ONGC: Azerbaijan fields to boost OVL's output

Though the latest acquisition will boost production, the related challenges with these projects, past experience and concerns on ONGC's domestic production will limit gains for the stock

ONGC Videsh Limited (OVL) surprised the Street positively and assured analysts that volumes from newly acquired Azerbaijan fields will be accounted for in FY13. A quick calculation by Mayur Patel, an analyst at Spark Capital suggests that a production of 1.13 million tonnes (MT) of crude for 15 months ending March’13 will accounted for in FY13, which will add Rs 600 crore to OVL’s bottom-line in FY13. This means that the effective date for Azerbaijan acquisition has been set at January’12 and the analyst expects the deal to be closed in the March’13 quarter.

This is a positive development for OVL, which is facing problems with its oil production from other geographies as Syria, Sudan etc due to geopolitical issues. As a result, OVL’s production has dropped nearly 14 per cent – from 1.15 MT in the June 2012 quarter to 0.99 MT in the September 2012 quarter. OVL’s production estimates for FY13 and FY14 thus stand revised downward from 7.5 MT and 8.6 MT to 6.9 MT and 7 MT of the oil equivalent (boe), respectively.

Its largest ever big ticket acquisition of Kashagan oilFields in North Caspian Sea is expected to contribute to production from FY14. This, along with the Azerbaijan acquisition is expected to boost the overall production by 0.9MT in FY13 itself.

Cautious stance

However, the Street still remains cautious given the company’s history. The acquisition of Russia-based Imperial Energy for around $2.6 billion has not yielded desired results yet. The production at the Russian company has been falling as OVL had stopped further investment in the Russian firm and is awaiting clarity on the appropriate technology for production from the tight reservoir.

As regards the Kashagan fields, the first phase of production getting is started in 2013 and has seen delay of eight years. Also, OVL is shelling out $5 billion for acquiring 8.4 per cent stake in these fields and is raising $1 billion in foreign currency bonds for the Azerbaijan purchase. This is in addition to huge capex planned by its patent company – ONGC – and can put pressure on the balance sheet. The debt levels, however, will be in reasonable limits and aided by good cash flows. On a consolidated basis, ONGC had cash and bank balances of Rs 27,900 crore and debt of about Rs 16,000 crore at the end of FY12.

ONGC itself has seen its domestic production come under pressure. It has already lowered the domestic production guidance from 32.1 MT to 29.1 MT posts September 2012 quarter results. Besides, there is still uncertainty regarding the subsidy burden it will have to share, which will get cleared only by the end of the fiscal. In the September’12 quarter, the company had to bear 40 per cent of the subsidy burden, as compared to 33 per cent in the previous corresponding quarter. A consensus analysts’ target price for the stock remains in the range of Rs 276 – 320.